An Introduction to Valuation
Prof. Dr. Martin Uk
What is a company valuation?
the company valuation is a part of investment lesson (i.e. M&As,
IPOs, Spin Offs)
you valuate by two perspectives
Sell Side
Buy Side
At the beginning there is a company analysis (i.e. Due Diligence)
Target function Maximize the SHV
Total Value Sum of operating value + non operating assets
Functions of a company valuation/
For what do we need a company valuation?
Main functions:
Decision making and consulting activities
Mediation
Argumentation
forecasts of company developments and its investments
investment of shareholders = company value
Auxiliary functions
Information
Tax measurement
Contract configuration
Functions of a company valuation/
For what do we need a company valuation?
Objective of Company Valuation:
- to buy Company
- to sell Company
- to give Company away
- to bequeath the Company
- Strategy
- Price
- Risk
Challenge
Company Value Company Price
Methods of Company Valuation
Entire valuation approaches
(Discounted Cash Flow
[DCF], Capitalized Earning Power Approach, Comparable
Company Analysis [CCA], Comparable Transaction Analysis
[CTA])
Single valuation approaches (Value in case of
liquidation, value of substance)
Valuation Methods - Overview
Entire approaches
Single approaches
CCA
Comparison Analysis
CTA
Value of substance
Capitalized Earning Power Appr.
Value in case of
liquidation
DCF-Approaches
Entity Approach
Equity Approach
Weighted Average Cost of Capital (WACC)
Adjusted Present Value (APV)
DCF (WACC) Steps
1. Free Cash Flow-Planning
Through CF determination, different accounting standards
become equilibrated
2. Determination of capital costs
Estimating Beta
3. Discount FCF and Calculate Enterprise Value
4. Calculate equity Value
DCF (WACC) Steps
1. Free Cash Flow-Planning
Receipt of payment from operative business
Overview: Cash flow calculation
-
Pay-outs from operative business
Cash Flow before interest and tax (CF)
Tax in case of complete equity financing
Operating Cash Flow (OCF)
Cash Flow from investment activity
Free Cash Flow (FCF)
Tax Shield
Total Cash Flow (TCF)
+/
-
Cash Flow from financing activity (incl. interest
payments / receipts)
Flow to Equity (FTE)
DCF (WACC) Steps
1. Free Cash Flow-Planning
Looking to the crystal ball
DCF (WACC) Steps
1. Free Cash Flow-Planning
Looking to the Past
DCF (WACC) Steps
1. Free Cash Flow-Planning
Looking to the Future
DCF (WACC) Steps
1. Free Cash Flow-Planning
Looking to the Future
DCF (WACC) Steps
2. Determination of capital costs
weighted average cost of capital (wacc)
E
D D
wacc CAPM r 1 t
V
V
E = Market Value of Equity
V = Company Market Value
D = Market Value of Debt
t = Tax Rate
CAPM = Capital Asset Pricing Model (cost of equity)
rD = cost of debt
DCF (WACC) Steps
2. Determination of capital costs
Capital Asset Pricing Model (CAPM)
CAPM rf r rf
M
CAPM = Capital Asset Pricing Model (cost of equity)
rM = Market Return
rf = Risk Free Rate
Beta
DCF (WACC) Steps
2. Determination of capital costs
Beta
COV ri , r M
VAR r M
ri = expected share return
rM = expected market return
i
i , M
M
DCF (WACC) Steps
3. Discount FCF and Calculate Enterprise Value
EV
Enterprise Value
t 1
FCFt
1 wacct
If: FCF and wacc continuous in the time:
EV
t 1
FCFt
1 wacct
FCF
wacc
Two stage model:
EV
t 1
FCFt
1 wacct
FCF1
1 wacc1
FCF2
1 wacc2
FCF3
1 wacc3
FCFT
waccT
DCF (WACC) Steps
4. Calculate Equity Value
Equity Value EV Debt Value
DCF (WACC)
Valuation of LUKOIL
WACC
Equity-Quota
Debt-Quota
CRP
riksFREE
Market Return
Beta
CAPM
Tax
rD
Debt
Today
g for 2012 & 2013
11,88%
89,01%
11,81%
8,54%
2,89%
11,43%
1,101
12,29%
20,00%
10,00%
7043
06.04.2009
1,00%
Year
t
FCF
PV(FCF)
31.12.2009
0,74
10.659,94
31.12.2010
1,74
5.910,56
31.12.2011
2,74
7.012,71
31.12.2012
3,74
7.082,84
31.12.2013
4,74
7.153,67
TV
4,74
7.153,67
9.813,36
4.863,28
5.157,33
4.655,69
4.202,84
35.370,02
EV
64.062,51
Market Value of Equity
57.019,51
Share Price
67,04
Comparable Company Analysis (CCA)
Basic - Information
CCA want to determine an objective Enterprise Value
CCA is a capital market orientated concept
CCA is influenced by expectations and valuations of the capital
market
CCA is an important part of each research report
CCA has historical and implicated data as its parts
Comparison Analysis
Selection of similar companies (comparable companies CC)
Selection of comparative values CompV (e.g. earnings, turnover, EBIT, )
Calculation of a multiple m (relation between the value of the comparable
company VCCC und the comparative value of this company)
Deduction of the value of the company which is to valuate (value of the
valuation object VCVO)
Based on experience (multiple method), stock exchange prices (Similar
Public Company Approach), proceeds of initial public offerings in the past
(IPO Approach) or realised transaction prices (Recent Acquisition
Approach).
VC VO CompVVO m
VC CC
CompVCC
Comparable Company Analysis (CCA)
Valuation of LUKOIL
Looking for Peers
Comparable Company Analysis (CCA)
Valuation of LUKOIL
Looking for Peers
Comparable Company Analysis (CCA)
MCAP
EV
Sales
EBITDA
CUR_MKT_CAP
CURR_ENTP_VAL SALES_REV_TURNEBITDA
EBIT
ROSN RU Equity
54.050.710.000,00
75.835,70
68.991,00
16.988,00
gazp rm equity
3.268.602.000.000,00
4.437.971,00
2.390.467,00 885.355,00
tnbp ru equity
14.103.660.000,00
16.238,66
25.739,00
8.684,00
nvtk ru equity
7.833.669.000,00
275.926,00
79.272,00
36.798,00
Multiples
EV/Sales
EV/EBITDA
EV/EBIT
1,77
4,71
5,73
EBIT
13.005,00
701.778,00
7.343,00
32.217,00
Company Name
LONG_COMP_NAME
Rosneft Oil Co
Gazprom OAO
TNK-BP Holding
NovaTek OAO
Comparable Company Analysis (CCA)
Lukoil
Number of Shares
LKOH
EQY_SH_OUT
RU Equity 850,56
Sales 2010
BEST_ESALES_NXT_YR
65.915,42
Stock Exch.
EV/Sales
EV/EBITDA
EV/EBIT
EBITDA 2010
EBIT 2010
Debt
BEST_EST_EBITDA_NXT_YR_MEAN
BEST_EEBI_NXT_YR_MEAN
Debt
10.734,78
9.154,08
7.043,00
Estimated Share Price
41,5
Difference to Stock Exch.
128,64
87,14
51,18
9,68
53,42
11,92
Company Valuation
Fair Value LUKOIL
Stock Exch.
EV/Sales
EV/EBITDA
EV/EBIT
DCF
Fair Value
Estimated Share Price
41,5
Difference to Stock Exch.
128,64
87,14
51,18
9,68
53,42
11,92
67,04
25,54
75,07
33,57
Single valuation approaches:
Value of substance
Split off the object of valuation into valuable parts.
Value of reproduction - How much is it to rebuild the company?
Supply market based.
Complete value of reproduction
Immaterial components are considered.
Fractional value of reproduction:
Immaterial components arent considered.
Single valuation approaches:
Value in case of liquidation
Split off the object of valuation into valuable parts.
Fiction of liquidation of the company.
Value the parts with sales market prices.
Adjustment of single values from the balance sheet (e.g. specific
liquidation costs). Debt has to be repayed.
Value of liquidation depends on the intesity and speed of the split off
Value of liquidation is the lower limit of the value of the company.
Single valuation approaches:
Value of substance
Problem: How should the reproduction of a brand or the defence
against competitors be valued?
Unnecessary components for operative business are valued by the
value in case of liquidation
The value of substance is the upper limit of the value of the company.
Excercise
Count the Value of following Companies:
- Adidas
- Puma
- Volkswagen
Compare the Company Value with the Company Price.
